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What is a Bear Market?

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  • Written By: Mary McMahon
  • Edited By: Bronwyn Harris
  • Last Modified Date: 09 November 2016
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When financial markets experience a widespread and substantial decrease, the prevailing economic conditions are referred to as a “bear market.” This is the opposite of a bull market, a market which is rapidly rising in value. When markets turn bearish, the results for investors and the general public can be nerve wracking. If a bear market persists, it is possible to enter into an economic depression. Bull markets, on the other hand, tend to generate widespread optimism as well as profits, with investors hoping that the market doesn't turn out to be a bubble.

People distinguish bear markets with different indicators. As a general rule, a true bear-style market is accompanied by serious pessimism among investors. Investors turn conservative, hoarding their portfolios and making cautious investments. This drives the market down even further, ultimately leading to a market decline of as much as 20%. A bear market also impacts multiple markets; in the United States, for example, both the NASDAQ and S&P indexes will start to fall. A decline in one market alone is not a bear, although it could mark the start of one.

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During a bear market, people tend to sell off their stocks, in the hopes of making a profit while they can. This can trigger a depression, with mass sales driving general panic. Some investors also engage in short selling, a potentially risky investment process in which they sell borrowed stocks off in the hopes of buying them back later at greatly reduced prices, keeping the difference in price. This can be dangerous if the market does not go as predicted.

It is important to distinguish a bear market from a correction. A correction happens when inflated stock prices fall to a more natural level. It is a more short term drop in stock and security values, and while it can be difficult to ride out, it is not characterized by mass pessimism and frustration with the downturn in the market. During a correction, savvy investors can purchase good stocks at lower prices, potentially turning a profit when the market surfaces from the correction.

Several things can trigger a bear market. Typically, the market downturn will be accompanied by a general recession, characterized by high unemployment and rising inflation. In addition, key indexes such as housing values will tend to fall rapidly. In the United States, one of the most well known bear markets was in the 1930s, during the Great Depression. Another emerged in the mid 1970s, a result of the stagflation economy.

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SarahSon
Post 4

I have recently thought about buying some stocks, but have found myself very confused. When you hear one person talking about a bullish market, someone else is saying there is a bear market.

How do you know which person is right? I have seen websites specifically focusing on bear market news and it seems like they are never bullish on the market.

With other sites, I read the exact opposite information for the same time period. I see myself as a positive person and know I would feel a lot more optimistic if I focused on the positive instead of hoping the market will go down so I make some money.

sunshined
Post 3

One thing I have noticed in a bear market is that stocks will usually fall faster than they rise. There seem to be more bull markets than bear markets, but when the markets start turning bearish, it seems like the stocks start falling pretty fast.

One thing that has hurt me in the past in trying to buy stocks during a bear market rally. These are usually head fakes, and after a short rally, they turn around and head lower again.

Because of this, I try to wait until a solid bottom has been put in before I am bullish again on a particular stock. A bear market can also last a long time and is not usually a short term thing.

John57
Post 2

@bagley79 - I know a guy who says he has made a lot of money using a bear market strategy. He also says the best time to do this is usually during the summer months.

The market is known to go down in the summer months and usually start to become bullish again later in the fall. I think it would be hard to time the market this way.

I am more of a buy and hold type of investor and think in the long run, stocks will always be a better investment than something like a certificate of deposit.

I don't like to watch my portfolio decrease in value during a bear market, but once they reach a certain level, they usually turn back around and are profitable again. If I tried to buy and sell at every high and low, I would probably never make any money in the stock market.

bagley79
Post 1

It is true that a bear market affects the optimism of many investors. I know that some people make a lot of money with bear market investing, but sometimes it seems contrary to everything we have been taught about the stock market.

Some people will say you can make money whether there is a bull market or a bear market, but I have never tried to do this.

It can be very frustrating to watch your investments go from being profitable to losing money. It is also hard to know when to get out, or if you will be better off waiting for them to come back.

There can be some great deals at the end of a bear market, but the hard thing is knowing when the bear market is over and the stocks will start to rebound.

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